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Where did the balance sheet and income statement go?

11 July 2016 | Published by AME

In case you’re not up to speed with the changes in accounting language – the balance sheet and the income statement are history. Our children and grandchildren will not know these terms and the terms will live in the accounting annals of history as relics for future generations.

The new name for a balance sheet is: A statement of financial position. The new name for an income statement is: A statement of financial performance.

The statement of financial position still has to balance (in the same way as a balance sheet always did). The assets (what we have) still have to balance to the liabilities (what we owe) and the equity (our owners’ share). The new name for a balance sheet – the statement of financial position – is however far more explanatory and tells you what the purpose of this statement is. This financial statement aims to convey what the financial position of the company is at a point in time (normally year-end). I.e. what is the bank balance at that point in time, what is the account receivable (debtors) balance, what are the equipment and stock balances at that point in time? In fact, we look at every asset, liability and equity account to determine its balance. And yes – once again – the statement of financial position will balance. It has to!

The statement of financial performance is also a far better name than the income statement. The income statement implies this statement is all about income – which it isn’t. The income statement also looks at all the expenses of the company and deducts the expenses from the income in order to arrive at either a profit or loss.

The statement of financial performance is a more accurate description of what this statement does. It tracks the financial performance of the company over the period (normally one year) in order to ascertain whether the company is profitable or not.

The name changes of these two statements do not affect how they function or what line items should be included in these statements. The new names merely give a clearer indication of their function. It will take some time for the new names to become common place. If you hear them spoken about, you now know what they mean and you can enthusiastically share your superior knowledge with your colleagues and friends.